Picks and Shovels

An investing framework: back the tools and infrastructure that others need in order to build, rather than the primary application bet. The wiki holds the thesis and its counter-arguments.

The thesis

• Software as the canonical case. Bart Macdonald asked which picks-and-shovels software company is most valuable, listing Atlassian ($57bn), Twilio ($51bn), Docusign ($45bn) and Hashicorp (What’s the Most Valuable Picks… (tweet)).
• AI. Gavin Baker argued in May 2023 that investing directly at the foundation-model layer, especially in venture, is unlikely to win, and that “We are going back to the 1990s. ‘Picks and shovels.’” (Really good. Directly investing in… (tweet); see Foundation Models).
• Empowering platforms. In Platforms in an Aggregator World, Thompson’s optimism rests on platforms such as Shopify, Stripe and Substack that give individual entrepreneurs world-class tools.

The counter-argument

Investors Love “pick and Shovel”… (tweet) (@buccocapital, October 2021) says investors forget the implication: lower friction and start-up cost remove barriers to entry, which increases competition and the capital needed to hold market share. This ties the framework to Competitive Moats and Barriers to Entry.

Elad Gil compared index companies to picks and shovels (recorded on Index Bets).

Where this appears

Tweets

• What’s the Most Valuable Picks… (tweet)
• Investors Love “pick and Shovel”… (tweet)
• Really good. Directly investing in… (tweet)

Long-reads

• Platforms in an Aggregator World

Concepts

• Index Bets